Iron-ore prices posted their biggest one-month fall in almost eight years as China’s huge steel engine cools and global shipments of the commodity rise.

The price fell 27% to $85.85 a metric ton by the end of August, the most since October 2011, according to S&P Global Platts. The collapse was triggered by global trade tensions after President
Trump
threatened to impose new tariffs on Chinese goods, some of which went into effect Sunday. The drop deepened amid sluggishness among the Chinese mills responsible for producing more than half the world’s steel, and concerns over future demand.

While the decline in prices eases pressure on steelmakers by reducing the cost of a key ingredient, it will erode the profits of large miners including
BHP Group Ltd.
BHP 1.88%
and
Rio Tinto
RIO 2.16%
PLC. The outlook for the commodity’s price meanwhile remains muddy, with market-watchers waiting for signals in China’s robust property market and Beijing’s efforts to stimulate economic growth for signs of a rebound.

“The violence of it has surprised me,” said
Serafino Capoferri,
a commodity strategist at Australian investment bank Macquarie. “I wasn’t expecting such a plunge.”

August’s dive almost erased a rally that pushed the market as high as $126 a ton in July, although prices have edged up to $89.35 a ton in recent days on better Chinese economic data, looser curbs on some steel production there and hopes of further stimulus.

Analysts are divided on where iron-ore prices head next.

Both of the forces that drove a surge in iron-ore prices at the start of 2019 have eased. Chinese steel production fell in June and July, albeit from record rates, and supplies of iron ore have picked up, particularly from Brazil.

Vale SA,
historically the industry’s top exporter, suspended a big chunk of production following a deadly dam collapse in January, but restarted some operations in June and plans to gradually resume more over the remainder of this year.

Chinese mills, which buy seven in every 10 tons of iron ore traded world-wide, have been buffeted on a number of fronts. The nation’s trade war with the U.S. has rattled confidence in the outlook for China’s already-slowing economic growth. The mills also face weaker profit margins, a depreciating yuan and environmental restrictions, all of which have exacerbated the conventional summer lull in steel demand.

A slowdown in China’s housing market—which accounts for roughly 40% of China’s steel demand—may push iron-ore prices as low as $50 a ton in the not-too-distant future, according to Liberum. The investment bank says that infrastructure projects designed to jump-start economic growth won’t use enough steel to offset a fall in real estate activity.

By contrast,
Goldman Sachs
sees iron-ore prices rebounding to $115 a ton within three months. Ample financing will be available to support property investments this year, and new Chinese building-design standards require the use of more steel, the Wall Street firm said.

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The bank predicts that the international iron-ore market will log its first supply deficit in seven years, and the widest since at least 2000.

Iron ore’s drop, however temporary, offers some relief for steelmakers, which were grappling with sharply higher prices for the raw material at a time when steel prices were softening.
U.S. Steel
recently said it was struggling with rising raw-material costs in Europe as it idled one furnace on the continent and two in the U.S.

Booming iron-ore prices have boosted earnings at BHP and Rio Tinto, the world’s two largest listed miners by market value, and enabled them to lavish cash on shareholders.

“We are not walking away from the fact that we do expect China to slow slightly, but we are also expecting infrastructure to come through a bit more strongly in the second half,”
Chris Salisbury,
chief executive of Rio Tinto’s iron-ore division, said in a recent interview. “We are cautiously optimistic.”

BHP is expecting more jolts, saying it could take up to three years for iron-ore supply to normalize from recent disruptions. Reporting a doubling of annual profit, the miner said “prices are likely to be volatile as that adjustment plays out.”

Both miners declined to comment further on the impact of falling prices. But even with the August drop, prices remain above long-term averages. Rio Tinto’s margin on Australian iron-ore sales broke above 70% in the first half of 2019.

The end of summer may herald higher steel output once again, said Argonaut Securities analyst
Helen Lau.
“If production starts to recover, iron-ore prices may also be able to recover a bit,” she said.

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